GOING against the tide is what Fitch Solutions Country Risk & Industry Research expects Bank Negara Malaysia (BNM) to do this year.
While many economists expect the central bank to retain the current overnight policy rate (OPR) at 1.75%, the research house maintained its view that BNM will slash its key policy rate a further 25 basis points (bps) to 1.50% by end-2021.
This, according to Fitch Solutions is necessary to support the economy against any impact from the third wave of COVID-19 infections and the lockdown measures taken to contain it.
“Indeed, rising fiscal constraints means that BNM will have to use its policy space to aid the recovery,” the research house pointed out in its latest commentary on Malaysia.
“Given that inflation is likely to remain low due to the economic disruption, BNM will be able to reduce interest rates without stoking price pressures.
“Our forecast is still subject to downside risks and depending on the full extent of the fallout from the lockdown over the coming months, BNM could cut interest rates more.”
On March 4, BNM decided to put on hold its benchmark OPR at 1.75% which was itself the result of 125bps worth of cuts in 2020 in order to support the economy against the COVID-19 pandemic’s impact.
In the statement accompanying the decision, BNM struck an optimistic tone despite acknowledging the risks arising from the third wave and the lockdown measures, saying that “while the re-imposition of containment measures will affect growth in the first quarter, the impact is expected to be less severe than that experienced in the second quarter of 2020”.
Fitch Solutions said it does not concord with BNM which expects the economy to begin recovering from 2Q 2021 onwards.
“We do not hold such an optimistic view as to the speed at which the outbreak can be brought under control and greater degrees of normalcy restored,” opined the research house.
“Indeed, we believe it is likely that when the economy proves to not be in as good a shape as the central bank expects in 2Q 2021, it will begin to consider a rate cut.”
Another key factor that solidifies Fitch Solutions’ view for a rate cut is the lack of fiscal resources to enact stimulus to support the economy.
“Indeed, as we have frequently noted over the past few months, the Government’s debt levels standing at 61% of gross domestic product (GDP) as of 3Q 2020, which is already above the legal debt limit of 60% that it has set for itself,” justified the research house.
“Furthermore, even if, as we believe to be likely, (that) the Government raises the debt limit for the second time since August 2020 to 65% of GDP, it is still left with little room for further spending, while raising the debt limit further to 70% of GDP could have an outsized impact on investor confidence and is unlikely to be considered.” – March 8, 2021